WEAKNESSES

Difficulty of consolidating public finances and bringing an end to deflation

Reduction of the workforce; increasing share of precarious workers

Political instability

Low productivity of SMEs

Risk assessment

Cyclical recovery will slow in 2018

Japan benefitted from a combination of cyclical factors in 2017, enabling it to reach a higher than anticipated level of growth. However, the economy is still subject to structural headwinds, which are set to come into force again in 2018 and lead to a slowdown in activity. GDP grew robustly in 2017, driven by foreign trade, a surge in the industrial production, and – to a lesser extent – fiscal stimulus, but private consumption remains lacklustre, as real wages have not expanded – despite a tight labour market, with the unemployment rate sitting at 2.8% in April its lowest level since June 1994. Wage growth has been constrained by Japanese companies’ sticky deflationary mind-set, which has resulted in insufficient efforts to redistribute profits. The structure of Japan’s labour market, which features rigid permanent contracts as well as a growing number of temporary workers, has also played a role in keeping wages and productivity depressed.

Domestic demand has played a muted role in boosting inflation. The modest pickup in inflation can be traced back to higher import prices – led by commodities – as well as a weaker yen. However, consumer price inflation remains below the Bank of Japan’s (BoJ) 2% target. Private investment will likely remain sluggish as investors wait to see signs of a real pickup in domestic demand. Notwithstanding this caveat, corporate profits, liquidity, and financial conditions are still favourable.

Going forwards, the Tokyo Olympics and an extension of BoJ’s ultra-accommodative monetary policies will continue to sustain economic momentum.

Consolidation of public finances remains a crucial issue

2017 saw a widening fiscal deficit in 2017, due to ongoing policy stimulus, the rebuilding of infrastructure after a series of natural disasters, and construction ahead of the Tokyo 2020 Olympic Games . However, there is less room to implement further fiscal stimulus going forwards: the increase in social spending significantly weighs on the state budget while revenues are insufficient. However, the government decided to postpone the next VAT rise (from 8% to 10%) until October 2019 for fear that another rate hike would cripple consumption. With a debt service burden representing 25% of GDP, the current trajectory of the debt accumulation does not appear sustainable, especially as costs continue to increase with the ageing population (health expenditure) and the 2020 Olympics (investment expenditure).

The current account is expected to remain in surplus in 2018. The yen has remained weak against the dollar, which has played a role in boosting exports in 2017. Robust demand from developed markets, a stabilization of the Chinese economy, and a pickup in global commodity prices, have also facilitated the increase in exports since the last quarter of 2016. However, this is not expected to continue considering the slowing demand from Japan’s main trading partners (China, the United States and Eurozone countries) and signs of commodity price weakness. Imports are expected to increase as households adjust to the expectations of another sales tax hike in 2019. The trade balance is expected to remain slightly in surplus. The services account will continue its consolidation as a result of the rise of tourism – Chinese tourists, in particular and the income balance, which will remain significant.

Abe wins a majority, clearing the path for reforms

Prime Minister Shinzo Abe took advantage of favourable cyclical conditions and called a snap election on October 2017, stating he was seeking a fresh mandate amid threats from North Korea. As expected, his Liberal Democratic Party (LDP) managed to secure a majority, which gives him ample room to forge ahead with economic reforms, and reform Article 9 of Japan’s pacifist constitution. The goal would be to increase military spending to 3% of GDP for defensive purposes. Prime Minister Abe has also stated that he is keen to revive the TPP, and on May 21st, trade ministers representing 11 of the 12 signatories met to revive the pact. Japan also wants to maintain close relations with the US so as to avoid being isolated in Asia, and is working on a bilateral trade agreement.

The North Korean threat continues to linger, posing a real security threat. The Korean neighbour has continued to forge ahead with its nuclear programme, despite reprimand from the international community. On August and September 2017, it flew ballistic missiles over Hokkaido, prompting Japanese authorities to sound alerts. Although global markets have so far heavily discounted the likelihood of a war with North Korea, a deterioration of investor sentiment could lead to the return of risk-off modes, triggering inflows into safe-haven assets such as the yen with a risk of derail ing the rebound in exports and impacting the profits of Japanese conglomerates.

Last update : January 2018

Payment

Japan has ratified the International Conventions of June 1930 on Bills of Exchange and Promissory Notes, and of March 1931 on Cheques. As a result, the validity of these instruments in Japan is subject to the same rules as in Europe.

The bill of exchange (kawase tegata) and the much more widely used promissory note (yakusoku tegata), when unpaid, allow creditors to initiate debt recovery proceedings via a fast-track procedure, subject to certain conditions. Although the fast-track procedure also applies to cheques (kogitte), their use is far less common for everyday transactions.

Clearing houses (tegata kokanjo) play an important role in the collective processing of the money supply arising from these instruments. The penalties for payment default act as a powerful deterrent: a debtor who fails twice in a period of six months to honour a bill of exchange, promissory note, or cheque collectable in Japan is subsequently barred for a period of two years from undertaking business-related banking transactions (current account, loans) with financial establishments attached to the clearing house. In other words, the debtor is reduced to a de facto state of insolvency.

These two measures normally result in the calling in of any bank loans granted to the debtor.

Bank transfers (furikomi), sometimes guaranteed by a standby letter of credit, have become significantly more common throughout the economy over recent decades thanks to widespread use of electronic systems in Japanese banking circles. Various highly automated interbank transfer systems are also available for local or international payments, like the Foreign Exchange Yen Clearing System (FXYCS, operated by the Tokyo Bankers Association) and the BOJ-NET Funds Transfer System (operated by Bank of Japan).

Payment made via the Internet site of the client’s bank is also increasingly common.

Debt collection

In principle, to avoid certain disreputable practices employed in the past by specialised companies, only lawyers (bengoshi) may undertake debt collection. However, a 1998 law established the profession of “servicer” to foster debt securitisation and facilitate collection of non-performing loans (NPL debts) held by financial institutions.

Servicers are debt collection companies licensed by the Ministry of Justice to provide collections services, but only for certain types of debt: bank loans, loans by designated institutions, loans contracted under leasing arrangements, credit card repayments, and so on.

Amicable phase

A settlement is always preferable, so as to avoid a lengthy and costly legal procedure. This involves obtaining, where possible, a signature from the debtor on a notarised deed that includes a forced-execution clause, which, in the event of continued default, is directly enforceable without requiring a prior court judgement.

The standard practice is for the creditor to send the debtor a recorded delivery letter with acknowledgement of receipt (naïyo shomeï), the content of which must be written in Japanese characters and certified by the post office.

The effect of this letter is to set back the statute of limitation by six months (which is five years for commercial debts). If the debtor still fails to respond, the creditor must start legal action during that period to retain the benefit of interruption of the limitation period.*

Legal proceedings

Fast-track proceedings

Summary proceedings, intended to allow creditors to obtain a ruling on payment (tokusoku tetsuzuki), apply to uncontested monetary claims and effectively facilitate obtaining a court order to pay (shiharaï meireï) from the judge within approximately six months.

If the debtor contests the order within two weeks of service of notice, the case is transferred to ordinary proceedings.

Ordinary proceedings

Ordinary proceedings are brought before the Summary Court (kan-i saibansho) for claims under JPY 1,400,000 and before the District Court (chiho saibansho) for claims above this amount.

Those proceedings, partly written (with submission of arguments and exchanges of type of evidence) and partly oral (with respective hearings of the parties and their witnesses) can take from one to three years as a result of the succession of hearings. These proceedings generate significant legal costs.

The distinctive feature of the Japanese legal system is the emphasis given to civil mediation (minji chôtei). Under court supervision, a panel of mediators – usually comprised of a judge and two neutral assessors – attempts to reach, by mutual concessions of the parties, an agreement on civil and commercial disputes.

In practice, litigants often settle the case at this stage of the procedure, before a judgment is delivered. While avoiding lengthy and costly legal proceedings, any transaction obtained through such mediation becomes enforceable once approved by the court.

Enforcement of a legal decision

A court judgment is enforceable if no appeal is lodged within two weeks. If the debtor does not comply with the decision, compulsory measures can be ordered through an execution against Real Property (an Examination Court issues a commencement order for a compulsory auction) or an execution against a claim (a compulsory execution is commenced through an order of seizure).

Japanese law provides for an exequatur procedure in order for foreign awards to be recognised and enforced. The court will verify several elements, such as whether the parties benefited from a due process of law, or if enforcement will be incompatible with Japanese public policy. Furthermore, if the issuing country does not have a reciprocal recognition and enforcement treaty with Japan, the decision will not be enforced by domestic courts.

Insolvency proceedings

Restructuring proceedings

There are two types of restructuring proceedings. The first of these is corporate reorganisation proceedings (kaisha kosei), which are typically used in complex insolvency cases involving stock companies. They come with the mandatory appointment of a reorganisation trustee by the court and with a stay against enforcement by both secured and unsecured creditors. The court typically appoints a third-party bengoshi with substantial experience in restructuring cases.

The second of these is civil rehabilitation proceedings (minji saisei), which are used to rehabilitate companies of almost any size and type. The debtor-in-possession (DIP) administers the rehabilitation under supervision of a court-appointed supervisor. Enforcement by secured creditors is not stayed in principle. The debtor must enter into settlement agreements with secured creditors in order to continue using the relevant collateral to conduct their business.

Winding up proceedings

There are two winding up proceedings. In bankruptcy proceedings (hasan), the court appoints a lawyer as trustee to administer the proceedings. Enforcement by secured creditors is not stayed; rather, they can freely exercise their claims outside of the bankruptcy proceedings. The trustee will usually attempt to sell secured collateral with the agreement of the secured creditors and contribute a percentage of the sales proceeds to the estate. The debtor’s estate is distributed to creditors in accordance with prescribed statutory priorities without any need for voting by the creditors.

The second, special liquidation (tokubetsu seisan), is used for stock companies. A liquidator is appointed by either a debtor’s shareholders or the court. Distributor of the debtor’s estate to creditors has to be approved by creditors with claims to two-thirds or more of the total debt or by way of settlement. This procedure is used when the debtor’s shareholders are confident that they will obtain creditors’ cooperation for the liquidation process, and wish to control the liquidation process without involvement of a trustee.